Bankrate.ca

 

August 26, 2013

 

Housing shows continued strength

Despite rising rates, sector indicators defy doomsayers                 

The country’s residential real estate sector continued to rack up solid numbers last month. The average price of existing homes sold via the Canadian Real Estate Association’s Multiple Listing service rose by 8.4 percent in July to $382,373 on a non-seasonally adjusted basis.

 

Homebuilders were also busy. According to the Canada Mortgage and Housing Corporation, housing starts hit a seasonally adjusted annual average pace of 192,853 units in July, roughly unchanged compared to June. On a six month moving average basis, starts trended up slightly to 187,416 units during the month, compared to 182,142 the previous month. Both paces are well in excess of the 175,000 new homes that would be expected to be constructed each year to keep pace with demand from immigration and new entrants into the workforce.

 

The CMHC also issued a forecast earlier this month that housing starts for full-year 2013 would be slightly weaker than in 2012. However the decline is expected to be mostly due to weakness during the first six months. During 2014 starts are expected to rise slightly due to a stronger job market, economic growth and increasing net migration.

 

The strong data are good news to those many sector stakeholders who hope that Canadian housing prices will make a soft landing, avoiding the outright crashes that hit many other national markets in recent years such as the United States, Japan, Spain and Ireland.

 

Dark clouds on the horizon

While Canadian residential real estate prices have doubled during the past decade according to the Teranet National Bank Composite House Price Index, analysts like to point out that there are many dark clouds on the horizon. Affordability is creeping up with average prices now in far over-valued territory relative both to rents and incomes. And while Canadians have been saving more, many remain financially strapped, particularly younger couples.

 

“Households have dramatically pared back their debt accumulation and repayments of mortgage principle have increased,” notes Leslie Preston an economist with TD Economics. “Despite this shift, Canadians remain highly-leveraged, and it will take quite some time for measures on leverage to return to historical norms.”

 

One reason for the tension relates to mortgage rates which have jumped by more than 30 percent in the past half year. For example TD Bank’s posted five-year closed rate is now 5.14 percent and its special rate is a 3.79 percent.

 

Another potential headache relates to demand for Canadian raw materials exports to emerging markets, which have been a major economic growth driver in recent years. One good advanced indicator of demand is the Canadian dollar, which has been falling lately. This a strong indication that markets believe that write-downs in projected growth in China, one of Canada’s largest customers, are real, could persist and even possibly spread to other countries.

 

That said, how serious these warning signs are, is anyone’s guess. All we can say right now is that while Canada’s housing sector may be surfing above overvalued territory, so far it looks like any coming landing will be soft.

 

peter@peterdiekmeyer.com

 

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